City issues new bonds to deal with sewer debt

February 9, 2011, 6:53PM

02/09/2011

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The City Council on Monday approved a $51 million, 25-year package of bonds that it will use to pay off bank loans and other debts related to the Ellis Creek sewer plant and other wastewater operations.

The bonds include $22.3 million to repay bank loans related to the sewer plant as well as an estimated $28.7 million in accrued interest over the 25-year term of the bonds, which will mature in 2030.

The bond package has been a focus of city finance staff ever since Measure U, the proposal to roll back sewer rates, failed in the November election.

"We really began in earnest after the November election to put together this bond package," said City Manager John Brown, who admitted that "it certainly isn't the best of all times to issue debt," but said that the bond revenue is needed now.

According to city officials, the bond package helps provide the lowest interest rate and reduce the burden on taxpayers.

Last July, the city was due to pay back two banks for loans that they offered to help fund the new sewer plant. At the time, the city planned to pay off the loans by issuing new bonds. But with the risk of Measure U passing in November, investors could not be found for the bonds, ensuring the city would miss the payment deadline. After negotiating with the two banks, the city agreed in June to a partial $10 million payment on the loans and an extension of credit to pay costs in the meantime.

The bonds approved Monday will pay the remaining $14.7 million that is due by June on the two bank loans. The new bonds will also pay about $5.5 million to refinance bonds issued in 2000 for various sewer system improvements. An additional $2.2 million of the new bond revenue will go into a debt service reserve fund.

Brown said that the city's existing reserve fund for the wastewater system could have been used to pay for the debt, but it would eliminate the reserve money that is needed in case of funding emergencies.

"We could pay for this debt without borrowing, but it would essentially leave us with no money," he said.

According to Steven Gortler, a consultant with Piper-Jaffray, who the city hired to analyze the bonds, the bonds will have fixed interest rates and can be refinanced after 10 years to take advantage of lower interest rates at that time.

"That will allow you to bring down the cost," he told the council on Monday.

Gortler went on to say that interest rates are now in the middle of where they have been in the last 20 years, and that the city should issue the bonds before rates increase.

The outstanding costs for the Ellis Creek sewer plant — which opened in 2009 and is considered state-of-the art — also include a low-interest state loan which paid for 85 percent of the cost of the plant. About $8 million per year is due on the loan each year. That amount is paid through revenue from ratepayers, and will not come from bond revenue in the package approved Monday.

Petaluma residents currently pay wastewater rates of about $62 each month, which is in the middle of rates for cities in Sonoma County.

The package of bonds was approved by the council 5-0, with Councilmember Mike Harris absent.

The City Council on Monday approved a $51 million, 25-year package of bonds that it will use to pay off bank loans and other debts related to the Ellis Creek sewer plant and other wastewater operations.

The bonds include $22.3 million to repay bank loans related to the sewer plant as well as an estimated $28.7 million in accrued interest over the 25-year term of the bonds, which will mature in 2030.

The bond package has been a focus of city finance staff ever since Measure U, the proposal to roll back sewer rates, failed in the November election.

"We really began in earnest after the November election to put together this bond package," said City Manager John Brown, who admitted that "it certainly isn't the best of all times to issue debt," but said that the bond revenue is needed now.

According to city officials, the bond package helps provide the lowest interest rate and reduce the burden on taxpayers.

Last July, the city was due to pay back two banks for loans that they offered to help fund the new sewer plant. At the time, the city planned to pay off the loans by issuing new bonds. But with the risk of Measure U passing in November, investors could not be found for the bonds, ensuring the city would miss the payment deadline. After negotiating with the two banks, the city agreed in June to a partial $10 million payment on the loans and an extension of credit to pay costs in the meantime.

The bonds approved Monday will pay the remaining $14.7 million that is due by June on the two bank loans. The new bonds will also pay about $5.5 million to refinance bonds issued in 2000 for various sewer system improvements. An additional $2.2 million of the new bond revenue will go into a debt service reserve fund.

Brown said that the city's existing reserve fund for the wastewater system could have been used to pay for the debt, but it would eliminate the reserve money that is needed in case of funding emergencies.

"We could pay for this debt without borrowing, but it would essentially leave us with no money," he said.

According to Steven Gortler, a consultant with Piper-Jaffray, who the city hired to analyze the bonds, the bonds will have fixed interest rates and can be refinanced after 10 years to take advantage of lower interest rates at that time.

"That will allow you to bring down the cost," he told the council on Monday.

Gortler went on to say that interest rates are now in the middle of where they have been in the last 20 years, and that the city should issue the bonds before rates increase.

The outstanding costs for the Ellis Creek sewer plant — which opened in 2009 and is considered state-of-the art — also include a low-interest state loan which paid for 85 percent of the cost of the plant. About $8 million per year is due on the loan each year. That amount is paid through revenue from ratepayers, and will not come from bond revenue in the package approved Monday.

Petaluma residents currently pay wastewater rates of about $62 each month, which is in the middle of rates for cities in Sonoma County.

The package of bonds was approved by the council 5-0, with Councilmember Mike Harris absent.